----

----

**UNITED      STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-QSB/A**

|   |   |                                                                                                                |
|--------|--------|---------------------------------------------------------------------------------------------------------------------|
| þ |   | **QUARTERLY                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF                1934** |
|   |   |                                                                                                                |

**For      the quarterly period ended June 30, 2007**

|   |   |                                                                                              |
|--------|--------|---------------------------------------------------------------------------------------------------|
| o      |   | **TRANSITION                REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE                ACT** |
|   |   |                                                                                              |
|   |   | **For                the Transition Period from __________ to __________**                        |

**Commission      file number 000-32925**

**AVATAR      SYSTEMS, INC.**

|                                                                                             |   |                                                                        |
|--------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|
| Texas(State                or other jurisdiction ofincorporation                or organization) |   | 75-2796037(I.R.S.                EmployerIdentification                No.) |
|                                                                                             |   |                                                                        |

----

----

----

| **PART                  I. FINANCIAL INFORMATION**                                                        |   |   | **1**  |   |
|-----------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
|                                                                                                      |   |   |   |   |
| Item                  1. Financial Statements                                                             |   |   | 1      |   |
| Item                  2. Management’s Discussion and Analysis or Plan of                  Operation |   |   | 8      |   |
| Item                  3. Controls and Procedures                                                          |   |   | 19     |   |
|                                                                                                      |   |   |   |   |
| **PART                  II. OTHER INFORMATION**                                                           |   |   | **19** |   |
|                                                                                                      |   |   |   |   |
| Item                  1. Legal Proceedings                                                                |   |   | 19     |   |
| Item                  2. Unregistered Sales of Equity Securities and Use of                  Proceeds     |   |   | 19     |   |
| Item                  3. Defaults Upon Senior Securities                                                  |   |   | 19     |   |
| Item                  4. Submission of Matters to a Vote of Security Holders                              |   |   | 19     |   |
| Item                  5. Other Information                                                                |   |   | 19     |   |
| Item                  6. Exhibits                                                                         |   |   | 19     |   |
| Signatures                                                                                                |   |   | 20     |   |

----

**PART      I. FINANCIAL INFORMATION**

**Item      1. Financial Statements**

| Avatar                  Systems, Inc.                                                             |
|---------------------------------------------------------------------------------------------------|
| **BALANCE                  SHEETS**                                                               |
|                                                                                              |   |   |   |   |   |
|                                                                                              |   | June                  30 |   | December                  31, |   |
|                                                                                              |   | 2007 |   | 2006 |   |
|                                                                                              |   | (unaudited) |   | (audited) |   |
| **ASSETS**                                                                                        |   |   |   |   |   |
| **CURRENT                  ASSETS**                                                               |   |   |   |   |   |
| Cash                  and cash equivalents                                                        |   | $ | 351,752 |   | $ | 322,047 |   |
| Marketable                  securities                                                            |   |   | 377,209 |   |   | 395,115 |   |
| Accounts                  receivable                                                              |   |   | 166,572 |   |   | 351,570 |   |
| Prepaid                  expenses and other current assets                                        |   |   | 34,567 |   |   | 31,499 |   |
| Deferred                  income taxes                                                            |   |   | 18,251 |   |   | 16,853 |   |
| **Total                  current assets**                                                         |   |   | 948,351 |   |   | 1,117,084 |   |
|                                                                                              |   |   |   |   |   |   |   |
| **PROPERTY                  AND EQUIPMENT**,                  net of accumulated depreciation     |   |   |   |   |   |   |   |
| of                  $591,218 and $489,004, respectively                                           |   |   | 380,273 |   |   | 456,514 |   |
| **PURCHASED                  SOFTWARE,**net                  of accumulated amortization          |   |   |   |   |   |   |   |
| of                  $1,142,079 and $989,144, respectively                                         |   |   | 1,861,285 |   |   | 2,014,219 |   |
| **SOFTWARE                  DEVELOPMENT COSTS,**                  net of accumulated amortization |   |   |   |   |   |   |   |
| of                  $2,005,682 and $1,779,122, respectively                                       |   |   | 3,004,394 |   |   | 2,752,417 |   |
|                                                                                              |   |   |   |   |   |   |   |
| **OTHER                  ASSETS, net**                                                            |   |   | 143,762 |   |   | 173,876 |   |
| **Total                  assets**                                                                 |   | $ | 6,338,065 |   | $ | 6,514,110 |   |

| **LIABILITIES,                    TEMPORARY EQUITY AND**                                                           |   |   |      |   |   |
|--------------------------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|--------|
| **PERMANENT                    STOCKHOLDERS' EQUITY**                                                              |   |   |      |   |   |
| **CURRENT                    LIABILITIES**                                                                         |   |   |      |   |   |
| Accounts                    payable                                                                                |   | $      | 222,717   |   | $      | 273,504 |   |
| Accrued                    expenses                                                                                |   |   | 133,777   |   |   | 161,678 |   |
| Line-of-credit                                                                                                     |   |   | 145,067   |   |   | 145,067 |   |
| Current                    maturities of capital lease obligations                                                 |   |   | 19,376    |   |   | 32,335 |   |
| Current                    maturities of long-term debt                                                            |   |   | 95,300    |   |   | 88,165 |   |
| Current                    maturities of notes payable-stockholders                                                |   |   | 106,067   |   |   | 71,608 |   |
| Deferred                    revenue                                                                                |   |   | 357,929   |   |   | 361,604 |   |
| **Total                    current liabilities**                                                                   |   |   | 1,080,233 |   |   | 1,133,961 |   |
|                                                                                                               |   |   |      |   |   |   |   |
| **DEFERRED                    INCOME TAXES**                                                                       |   |   | 595,543   |   |   | 587,684 |   |
|                                                                                                               |   |   |      |   |   |   |   |
| **OTHER                    LONG-TERM LIABILITIES**                                                                 |   |   | 88,076    |   |   | 93,361 |   |
|                                                                                                               |   |   |      |   |   |   |   |
| **LONG-TERM                    DEBT**                                                                              |   |   |      |   |   |   |   |
| Long-term                    capital lease obligations                                                             |   |   | 25,534    |   |   | 34,549 |   |
| Long-term                    debt                                                                                  |   |   | 344,832   |   |   | 412,244 |   |
| Note                    payable-stockholders                                                                       |   |   | 498,868   |   |   | 567,403 |   |
| Convertible                    notes payable-stockholders                                                          |   |   | 280,000   |   |   | 280,000 |   |
| **Total                    long-term debt**                                                                        |   |   | 1,149,234 |   |   | 1,294,196 |   |
| **Total                    liabilities**                                                                           |   |   | 2,913,086 |   |   | 3,109,202 |   |
|                                                                                                               |   |   |      |   |   |   |   |
| **COMMITMENTS                    AND CONTINGENCIES**                                                               |   |   | -         |   |   | - |   |
|                                                                                                               |   |   |      |   |   |   |   |
| **TEMPORARY                    EQUITY**                                                                            |   |   |      |   |   |   |   |
| Common                    stock, subject to put rights, 200,000 shares issued and                    outstanding   |   |   | 101,000   |   |   | 101,000 |   |
|                                                                                                               |   |   |      |   |   |   |   |
| **PERMANENT                    STOCKHOLDERS' EQUITY**                                                              |   |   |      |   |   |   |   |
| Preferred                    stock, $0.001 par value, 10,000,000 shares authorized; none                    issued |   |   | -         |   |   | - |   |
| Common                    stock, $0.001 par value; 30,000,000 shares authorized;                                   |   |   |           |   |   |  |   |
| 8,838,152                    shares issued and outstanding                                                         |   |   | 8,838     |   |   | 8,838 |   |
| Paid-in                    capital                                                                                 |   |   | 2,162,270 |   |   | 2,154,741 |   |
| Retained                    earnings                                                                               |   |   | 1,139,564 |   |   | 1,130,006 |   |
| Accumulated                    other comprehensive income                                                          |   |   | 13,307    |   |   | 10,323 |   |
| **Total                    stockholders' equity**                                                                  |   |   | 3,323,979 |   |   | 3,303,908 |   |
| **Total                    liabilities, temporary equity and permanent stockholders'                    equity**   |   | $      | 6,338,065 |   | $      | 6,514,110 |   |

| See                    accompanying notes to financial                    statements. |
|---------------------------------------------------------------------------------------|

----

| Avatar                  Systems, Inc.                   |
|---------------------------------------------------------|
| **STATEMENTS                  OF INCOME**               |
| (unaudited)                                             |
|                                                    |   |   |   |   |   |   |   |   |   |
|                                                    |   | Three                  months ended |   | Six                  months ended |   |
|                                                    |   | June                  30, |   | June                  30, |   |
|                                                    |   | 2007 |   | 2006 |   | 2007 |   | 2006 |   |
|                                                    |   |   |   |   |   |   |   |   |   |
| **Revenue:**                                            |   |   |   |   |   |   |   |   |   |
| Software                                                |   | $ | 170,924 |   | $ | 306,768 |   | $ | 314,675 |   | $ | 383,468 |   |
| Maintenance                                             |   |   | 651,099 |   |   | 374,685 |   |   | 1,277,393 |   |   | 708,074 |   |
| Professional                  services                  |   |   | 148,752 |   |   | 153,628 |   |   | 325,643 |   |   | 215,860 |   |
| Hardware                                                |   |   | 2,648 |   |   | 91,207 |   |   | 21,961 |   |   | 114,476 |   |
| **Total                  revenue**                      |   |   | 973,423 |   |   | 926,288 |   |   | 1,939,672 |   |   | 1,421,878 |   |
|                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Cost                  of revenue:**                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Software                                                |   |   | 42,201 |   |   | 124,514 |   |   | 102,252 |   |   | 163,017 |   |
| Maintenance                                             |   |   | 111,909 |   |   | 69,334 |   |   | 229,508 |   |   | 129,001 |   |
| Professional                  services                  |   |   | 53,867 |   |   | 28,186 |   |   | 109,793 |   |   | 46,854 |   |
| Hardware                                                |   |   | 1,990 |   |   | 77,654 |   |   | 18,918 |   |   | 91,627 |   |
| **Total                  cost of revenue**              |   |   | 209,967 |   |   | 299,688 |   |   | 460,471 |   |   | 430,499 |   |
|                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Gross                  profit**                       |   |   | 763,456 |   |   | 626,600 |   |   | 1,479,201 |   |   | 991,379 |   |
|                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating                  expenses:**                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                  and marketing                    |   |   | 120,347 |   |   | 63,348 |   |   | 226,258 |   |   | 139,037 |   |
| General                  and administrative             |   |   | 313,715 |   |   | 161,723 |   |   | 624,253 |   |   | 300,809 |   |
| Amortization                                            |   |   | 189,747 |   |   | 98,161 |   |   | 379,495 |   |   | 196,323 |   |
| Depreciation                                            |   |   | 51,107 |   |   | 51,913 |   |   | 102,214 |   |   | 102,437 |   |
| **Total                  operating expenses**           |   |   | 674,916 |   |   | 375,145 |   |   | 1,332,220 |   |   | 738,606 |   |
|                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating                  income**                   |   |   | 88,540 |   |   | 251,455 |   |   | 146,981 |   |   | 252,773 |   |
|                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other                  income (expense):**            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment                  income                      |   |   | 4,231 |   |   | 6,689 |   |   | 8,463 |   |   | 12,304 |   |
| Loss                  on sales of marketable securities |   |   | - |   |   | (258 | ) |   | (15 | ) |   | (258 | ) |
| Interest                  expense                       |   |   | (69,329 | ) |   | (3,265 | ) |   | (140,947 | ) |   | (5,689 | ) |
| **Total                  other income (expense)**       |   |   | (65,098 | ) |   | 3,166 |   |   | (132,499 | ) |   | 6,357 |   |
|                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Income                  before income taxes**         |   |   | 23,442 |   |   | 254,621 |   |   | 14,482 |   |   | 259,130 |   |
|                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred                  income tax expense            |   |   | 7,970 |   |   | 86,571 |   |   | 4,924 |   |   | 88,104 |   |
|                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **NET                  INCOME**                         |   | $ | 15,472 |   | $ | 168,050 |   | $ | 9,558 |   | $ | 171,026 |   |

| **Other                  comprehensive income, net of tax**      |   |   |      |   |   |      |   |   |      |
|------------------------------------------------------------------|--------|--------|-----------|--------|--------|-----------|--------|--------|-----------|
| Unrealized                  gain on marketable securities        |   |   | 3,998     |   |   | 1,526     |   |   | 4,521     |   |   | 9,641 |   |
| Deferred                  income tax expense                     |   |   | 1,359     |   |   | 519       |   |   | 1,537     |   |   | 3,278 |   |
| **Other                  comprehensive income**                  |   |   | 2,639     |   |   | 1,007     |   |   | 2,984     |   |   | 6,363 |   |
|                                                             |   |   |      |   |   |      |   |   |      |   |   |   |   |
| **Total                  comprehensive income**                  |   | $      | 18,111    |   | $      | 169,057   |   | $      | 12,542    |   | $ | 177,389 |   |
|                                                             |   |   |      |   |   |      |   |   |      |   |   |   |   |
| **Net                  income per share:**                       |   |   |      |   |   |      |   |   |      |   |   |   |   |
| **Basic                  and diluted**                           |   | $      | -         |   | $      | 0.02      |   | $      | -         |   | $ | 0.02 |   |
|                                                             |   |   |      |   |   |      |   |   |      |   |   |   |   |
| **Weighted                  average common shares outstanding:** |   |   |      |   |   |      |   |   |      |   |   |   |   |
| **Basic**                                                        |   |   | 9,038,152 |   |   | 8,838,152 |   |   | 9,038,152 |   |   | 8,838,152 |   |
| **Diluted**                                                      |   |   | 9,822,866 |   |   | 8,838,152 |   |   | 9,799,247 |   |   | 8,838,152 |   |

| See                  accompanying notes to financial                  statements. |
|-----------------------------------------------------------------------------------|

----

| Avatar                  Systems, Inc.                                 |
|-----------------------------------------------------------------------|
| **STATEMENTS                  OF CASH FLOWS**                         |
| (unaudited)                                                           |
|                                                                  |
|                                                                  |   | Six                  months ended |   |
|                                                                  |   | June                  30, |   |
|                                                                  |   | 2007 |   | 2006 |   |
|                                                                  |   |   |   |   |   |
|                                                                  |   |   |   |   |   |
| **Cash                  flows from operating activities**             |   |   |   |   |   |
| Net                  income                                           |   | $ | 9,558 |   | $ | 171,026 |   |
| Adjustments                  to reconcile net income to net cash      |   |   |   |   |   |   |   |
| provided                  by operating activities:                    |   |   |   |   |   |   |   |
| Amortization                  of software costs                       |   |   | 379,495 |   |   | 196,323 |   |
| Non-cash                  interest expense                            |   |   | 64,663 |   |   | - |   |
| Depreciation                                                          |   |   | 102,214 |   |   | 102,437 |   |
| Loss                  on sale of marketable securities                |   |   | (15 | ) |   | 258 |   |
| Stock                  compensation expense                           |   |   | 7,528 |   |   | - |   |
| Deferred                  income taxes                                |   |   | 4,924 |   |   | 88,104 |   |
| Changes                  in operating assets and liabilities:         |   |   |   |   |   |   |   |
| Accounts                  receivable                                  |   |   | 184,998 |   |   | (52,697 | ) |
| Prepaid                  expenses and other current assets            |   |   | (3,068 | ) |   | 5,602 |   |
| Other                  assets                                         |   |   | - |   |   | (1,659 | ) |
| Accounts                  payable                                     |   |   | (50,787 | ) |   | 11,285 |   |
| Accrued                  expenses                                     |   |   | (27,901 | ) |   | (5,609 | ) |
| Deferred                  revenue                                     |   |   | (3,675 | ) |   | 48,454 |   |
| Other                  long-term liabilities                          |   |   | (5,285 | ) |   | 58,130 |   |
| Net                  cash provided by operating activities            |   |   | 662,649 |   |   | 621,654 |   |
|                                                                  |   |   |   |   |   |   |   |
| **Cash                  flows from investing activities**             |   |   |   |   |   |   |   |
| Software                  development costs capitalized               |   |   | (478,538 | ) |   | (284,700 | ) |
| Purchases                  of property and equipment                  |   |   | (25,973 | ) |   | (81,399 | ) |
| Purchases                  of marketable securities                   |   |   | (502,557 | ) |   | (430,671 | ) |
| Proceeds                  from sale of marketable securities          |   |   | 525,000 |   |   | 150,506 |   |
| Net                  cash used in investing activities                |   |   | (482,068 | ) |   | (646,264 | ) |
|                                                                  |   |   |   |   |   |   |   |
| **Cash                  flows from financing activities**             |   |   |   |   |   |   |   |
| Principal                  payments on capital lease obligations      |   |   | (21,974 | ) |   | (17,078 | ) |
| Principal                  payments on long-term debt                 |   |   | (60,277 | ) |   | (4,079 | ) |
| Principal                  payments on long-term debt-stockholders    |   |   | (68,625 | ) |   | - |   |
| Net                  cash used in financing activities                |   |   | (150,876 | ) |   | (21,157 | ) |
|                                                                  |   |   |   |   |   |   |   |
| Net                  increase (decrease) in cash and cash equivalents |   |   | 29,705 |   |   | (45,767 | ) |
|                                                                  |   |   |   |   |   |   |   |
| Cash                  and equivalents at beginning of period          |   |   | 322,047 |   |   | 257,056 |   |
|                                                                  |   |   |   |   |   |   |   |
| Cash                  and cash equivalents at end of period           |   | $ | 351,752 |   | $ | 211,289 |   |

| Supplemental                  disclosure of cash paid for:                              |   |   |   |   |   |
|-----------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
| Interest                                                                                |   | $      | 76,285 |   | $      | 5,689 |   |
|                                                                                    |   |   |   |   |   |   |   |
| Supplemental                  disclosure of noncash investing and financing activities: |   |   |   |   |   |   |   |
| Purchase                  of equipment under capital lease obligation                   |   | $      | -      |   | $      | 29,800 |   |
| Change                  in unrealized gain on marketable securities, net of tax         |   | $      | 2,984  |   | $      | 6,363 |   |
|                                                                                    |   |   |   |   |   |   |   |
| See                  accompanying notes to financial statements.                        |   |   |   |   |   |   |   |

----

**AVATAR        SYSTEMS, INC.**

**NOTES        TO FINANCIAL STATEMENTS**

**(Unaudited)**

**1.      Basis of Presentation**

**2.      Recent Accounting Standards and Pronouncements**

*Accounting      for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109      Accounting for Income Taxes*

**3.      Acquisition**

|  | · | cash                paid to the Sellers in the aggregate amount of                $1,790,634; |
|--|--------|-----------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|  | · | convertible                promissory notes issued to the Sellers in the aggregate amount of                $280,000; |
|--|--------|-----------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|  | · | an                aggregate of 200,000 shares of common stock of the Company issued                to the                Sellers, valued at $0.505 per share in accordance with EITF 99-12,                “Determination                of the Measurement Date for the Market Price of Acquirer Securities                Issued                in a Purchase Business Combination”;                and |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|  | · | transaction                costs of $67,789. |
|--|--------|----------------------------------------------|

----

**AVATAR        SYSTEMS, INC.**

**NOTES        TO FINANCIAL STATEMENTS**

**(Unaudited)**

| Current                  assets         |   | $      | 138,116   |   |
|-----------------------------------------|--------|--------|-----------|--------|
| Computers                  and software |   |   | 27,370    |   |
| Furniture                  and fixtures |   |   | 14,379    |   |
| Purchased                  software     |   |   | 2,141,702 |   |
| Current                  liabilities    |   |   | (82,144   | )      |
|                                    |   | $      | 2,239,423 |   |

|                                                         |   | Three                  months |      | Six                  months |   |
|--------------------------------------------------------------|--------|-------------------------------|-----------|-----------------------------|--------|
|                                                         |   | ended                         |      | ended                       |   |
|                                                         |   | June                  30      |      | June                  30    |   |
|                                                         |   | 2006                          |      | 2006                        |   |
|                                                         |   | (unaudited)                   |      | (unaudited)                 |   |
| Total                  revenue                               |   | $                             | 1,358,765 |                        | $      | 2,360,609 |   |
| Net                  income                                  |   | $                             | 250,617   |                        | $      | 435,349 |   |
| Net                  income per share:                       |   |                          |      |                        |   |   |   |
| Basic                  and diluted                           |   | $                             | 0.03      |                        | $      | 0.05 |   |
| Weighted                  average common shares outstanding: |   |                          |      |                        |   |   |   |
| Basic                                                        |   |                          | 9,038,152 |                        |   | 9,038,152 |   |
| Diluted                                                      |   |                          | 9,644,887 |                        |   | 9,341,519 |   |

**4.      Long-term Debt**

**Long-term      Debt to Financial Institution**

----

**AVATAR        SYSTEMS, INC.**

**NOTES        TO FINANCIAL STATEMENTS**

**(Unaudited)**

**Note      Payable-Stockholders**

----

**AVATAR        SYSTEMS, INC.**

**NOTES        TO FINANCIAL STATEMENTS**

**(Unaudited)**

**Convertible        Notes Payable-Stockholders**

**5.      Temporary Equity**

*Classification      and Measurement of Redeemable Securities.*

**6.      Stock Option Plans**

----

**AVATAR      SYSTEMS, INC.**

**NOTES      TO FINANCIAL STATEMENTS**

**(Unaudited)**

|                                                                   |   | Three                  months ended |    | Six                  months ended |   |
|------------------------------------------------------------------------|--------|-------------------------------------|---------|-----------------------------------|--------|
|                                                                   |   | June                  30            |    | June                  30          |   |
|                                                                   |   | 2007                                |    | 2006                              |   | 2007 |   | 2006 |   |
| Operating                  expenses:                                   |   |                                |    |                              |   |   |   |   |   |
| General                  and administrative (employee related options) |   | $                                   | 3,764   |                              | $      | - |   | $ | 7,528 |   | $ | - |   |
| Other                  income (expense):                               |   |                                |    |                              |   |   |   |   |   |   |   |   |   |
| Interest                  expense                                      |   |                                | 32,364  |                              |   | - |   |   | 62,930 |   |   | - |   |
| Share-based                  expense before taxes                      |   |                                | 36,128  |                              |   | - |   |   | 70,458 |   |   | - |   |
| Related                  income tax benefits                           |   |                                | (12,284 | )                                 |   | - |   |   | (23,956 | ) |   | - |   |
| Share-based                  expense, net of taxes                     |   | $                                   | 23,844  |                              | $      | - |   | $ | 46,502 |   | $ | - |   |

**Stock      Option Activity **

|                                                      |   | Options |      | Weighted                  Average Exercise Price |   | Weighted                  Average Remaining Contractual Term (years) |   | Aggregate                  Intrinsic Value |   |
|-----------------------------------------------------------|--------|---------|-----------|--------------------------------------------------|--------|----------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                      |   |    |      |                                             |   |                                                                 |   |                                       |   |
| Options                  outstanding at December 31, 2006 |   |    | 1,276,477 |                                             | $      | 0.528                                                                |   |                                       |   |   |   |   |   |
| Options                  granted                          |   |    | -         |                                             |   | -                                                                    |   |                                       |   |   |   |   |   |
| Options                  exercised                        |   |    | -         |                                             |   | -                                                                    |   |                                       |   |   |   |   |   |
| Options                  forfeited                        |   |    | (13,000   | )                                                | $      | 0.505                                                                |   |                                       |   |   |   |   |   |
| Options                  outstanding at June 30, 2007     |   |    | 1,263,477 |                                             | $      | 0.528                                                                |   |                                       | 6.58   |   | $ | 556,920 |   |
| Options                  exercisable at June 30, 2007     |   |    | 1,039,477 |                                             | $      | 0.533                                                                |   |                                       | 6.03   |   | $ | 455,000 |   |

**Item      2. **
**Management’s      Discussion and Analysis or Plan of Operation**

**SPECIAL      NOTE REGARDING FORWARD-LOOKING STATEMENTS**

----

**AVATAR        SYSTEMS, INC.**

**NOTES        TO FINANCIAL STATEMENTS**

**(Unaudited)**

**Three      Months Ended June 30, 2007 Compared to Three Months Ended June 30,      2006**

*Revenue:*

|                                   |   | Three                  months ended |    |   |   |    |   |
|----------------------------------------|--------|-------------------------------------|---------|--------|--------|---------|--------|
|                                   |   | June                  30,           |    | Change |   |
|                                   |   | 2007                                |    | 2006   |   | Amount  |   | % |   |
|                                   |   |                                |    |   |   |    |   |   |   |
| Software                               |   | $                                   | 170,924 |   | $      | 306,768 |   | $ | (135,844 | ) |   | (44.3 | ) |
| Maintenance                            |   |                                | 651,099 |   |   | 374,685 |   |   | 276,414 |   |   | 73.8 |   |
| Professional                  services |   |                                | 148,752 |   |   | 153,628 |   |   | (4,876 | ) |   | (3.2 | ) |
| Hardware                               |   |                                | 2,648   |   |   | 91,207  |   |   | (88,559 | ) |   | (97.1 | ) |
| Total                  revenue         |   | $                                   | 973,423 |   | $      | 926,288 |   | $ | 47,135 |   |   | 5.1 |   |

*Software:*

|   | · | Revenue                from software sales for the quarter ended June 30, 2007 was $170,924                compared with $306,768 from the quarter ended June 30,                2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Software                sales of Questa products were $136,120 for the quarter ended June                30,                2007. Sales of the Integra product were impacted primarily by customer                upgrades to Integra. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Software                sales of Avatar products for the quarter ended decreased 88.7% to                $34,804                compared with $306,768 for the quarter ended June 30,                2006. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Sales                of Avatar products were unusually strong during the second quarter                of 2006                compared with the second quarter of                2007. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Maintenance:*

|   | · | Maintenance                revenue for the quarter ended June 30, 2007 increased 73.8% to $651,099                compared with $374,685 in 2006. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in maintenance revenue related to the Questa acquisition                was                $207,952 for the quarter ended June 30,                2007. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Maintenance                revenue for existing products increased 18.3% to $443,147 compared                with                $374,685 in 2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in maintenance revenue was primarily related to the strength                of                ASP sales in 2007 and 2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

*Professional      services:*

|   | · | Professional                service revenue for the quarter ended June 30, 2007 decreased 3.2%                to                $148,752 compared with $153,628 for the quarter ended June 30,                2006. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in professional services revenue related to the Questa                acquisition was $78,388. Questa has historically received a higher                percentage of revenue from implementation and data conversion services                than Avatar. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Professional                services related to the Questa acquisition were higher because of                stronger                sales of the Integra system and an increase in the professional services                billing rate. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**AVATAR        SYSTEMS, INC.**

**NOTES        TO FINANCIAL STATEMENTS**

**(Unaudited)**

|   | · | Professional                services related to existing products decreased 54.2% to $70,364                for the                quarter ended June 30, 2007 compared with $153,628 in 2006. The decrease                in professional services related to existing products was due to                a very                strong quarter in 2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Hardware:*

|   | · | Hardware                sales for the quarter ended June 30, 2007 decreased to $2,648 compared                with $91,207 in 2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Questa                was not a reseller of hardware products. We expect hardware sales                to                increase in the future because of the acquisition, anticipated technology                changes and relationships that we have with hardware                vendors. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**AVATAR      SYSTEMS, INC.**

**NOTES      TO FINANCIAL STATEMENTS**

**(Unaudited)**

*Cost      of Revenue:*

|                                   |   | Three                  months ended |    |   |   |    |   |
|----------------------------------------|--------|-------------------------------------|---------|--------|--------|---------|--------|
|                                   |   | June                  30,           |    | Change |   |
|                                   |   | 2007                                |    | 2006   |   | Amount  |   | %  |   |
|                                   |   |                                |    |   |   |    |   |   |   |
| Software                               |   | $                                   | 42,201  |   | $      | 124,514 |   | $ | (82,313 | ) |   | (66.1 | ) |
| Maintenance                            |   |                                | 111,909 |   |   | 69,334  |   |   | 42,575 |   |   | 61.4 |   |
| Professional                  services |   |                                | 53,867  |   |   | 28,186  |   |   | 25,681 |   |   | 91.1 |   |
| Hardware                               |   |                                | 1,990   |   |   | 77,654  |   |   | (75,664 | ) |   | (97.4 | ) |
| Total                  cost of revenue |   | $                                   | 209,967 |   | $      | 299,688 |   | $ | (89,721 | ) |   | (29.9 | ) |

*Software:*

|   | · | Cost                of software sales for the quarter ended June 30, 2007 decreased 66.1%                to                $42,201 compared with $124,514 for the quarter ended June 30,                2006. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of software sales of Questa products for the quarter ended June 30,                2007                were $23,341. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of software sales for existing products decreased 84.9% to $18,860                from                $124,514 in 2006 primarily due to lower commission costs because                of the                lower sales volume. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of software as a percentage of the related revenue decreased to 24.7%                for                the quarter ended June 30, 2007 from 40.6% in 2006. Sales                were higher for our internally developed products with higher margins                during the quarter ended June 30, 2007. Margins were less during                the                quarter ended June 30, 2006 because we sold products that we purchase                from                outside vendors with higher costs than our internally developed                products. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | We                expect cost of software sales to increase in the future because of                an                increase in the cost of database                components. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Maintenance:*

|   | · | Cost                of maintenance revenue for the quarter ended June 30, 2007 increased                61.4%                to $111,909 compared with $69,334 in                2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in cost of maintenance revenue related to the Questa acquisition                was $20,270 for the quarter ended June 30,                2007. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of maintenance revenue for existing products increased 32.2% to $91,639                compared with $69,334 in 2006. The increase in cost of maintenance                revenue                was directly related to the increase in maintenance revenue from                strong                ASP sales completed during 2007 and                2006. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of maintenance as a percentage of the related revenue decreased slightly                to 17.2% for the quarter ended June 30, 2007 compared with 18.5%                in 2006. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Professional      services:*

|   | · | Cost                of professional services for the quarter ended June 30, 2007 increased                91.1% to $53,867 compared with $28,186 in                2006. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in cost of professional services related to the Questa                acquisition was $30,493 for the quarter ended June 30,                2007. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**AVATAR        SYSTEMS, INC.**

**NOTES        TO FINANCIAL STATEMENTS**

**(Unaudited)**

|   | · | Cost                of professional services for existing products decreased 17.1% to                $23,374                compared with $28,186 in 2006. The decrease in cost of professional                services was directly related to the decrease in professional services                revenue. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of professional services as a percentage of the related revenue increased                to 36.2% for the quarter ended June 30, 2007 compared with 18.3%                in                2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Hardware:*

|   | · | Cost                of hardware sales for the quarter ended June 30, 2007 decreased to                $1,990                compared with $77,654 in 2006. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Operating      Expenses:*

|                                        |   | Three                  months ended |    |   |   |    |   |
|---------------------------------------------|--------|-------------------------------------|---------|--------|--------|---------|--------|
|                                        |   | June                  30,           |    | Change |   |
|                                        |   | 2007                                |    | 2006   |   | Amount  |   | % |   |
|                                        |   |                                |    |   |   |    |   |   |   |
| Sales                  and marketing        |   | $                                   | 120,347 |   | $      | 63,348  |   | $ | 56,999 |   |   | 90.0 |   |
| General                  and administrative |   |                                | 313,715 |   |   | 161,723 |   |   | 151,992 |   |   | 94.0 |   |
| Amortization                                |   |                                | 189,747 |   |   | 98,161  |   |   | 91,586 |   |   | 93.3 |   |
| Depreciation                                |   |                                | 51,107  |   |   | 51,913  |   |   | (806 | ) |   | (1.6 | ) |
| Total                  operating expenses   |   | $                                   | 674,916 |   | $      | 375,145 |   | $ | 299,771 |   |   | 79.9 |   |

*Sales      and Marketing:*

|   | · | Sales                and marketing expenses for the quarter ended June 30, 2007 increased                90.0%                to $120,347 compared with $63,348 in                2006. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Sales                and marketing expenses related to the Questa acquisition were $13,087                for                the quarter ended June 30, 2007. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Sales                and marketing expenses related to our existing business increased                69.3% to                $107,260 for the quarter ended June 30, 2007 compared with $63,348                in                2006. The increase in sales and marketing expenses was related primarily                to the addition of a director of                marketing. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Sales                and marketing expenses as a percentage of total revenues increased                to                12.4% for 2007 compared with 6.8% for 2006 primarily due to the Questa                acquisition and the addition of a director of                marketing. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*General      and administrative:*

|   | · | General                and administrative expenses for the quarter ended June 30, 2007 increased                94.0% to $313,715 compared with $161,723 in 2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | General                and administrative expenses related to the Questa acquisition for                the                quarter ended June 30, 2007 were                $70,546. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | General                and administrative expenses for our existing business increased 50.4%                to                $243,169 from $161,723 in 2006. General and administrative costs                increased                primarily due to charge-offs from bad debts, insurance costs, accounting                and auditing costs incurred related to the Questa acquisition, and                an                increase in investor relations                expenses. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | General                and administrative expenses as a percentage of total revenue increased                to                32.2% for the quarter ended June 30, 2007, compared with 17.5% in                2006.                The increase in general and administrative expense as a percentage                of                total revenue resulted from the Questa acquisition and the increases                referred to above. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

*Amortization:*

|   | · | Amortization                expense increased 93.3% to $189,747 for the quarter ended June 30,                2007                from $98,161 in 2006. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in amortization expense related to the acquisition of Questa                was                $78,318. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------|

----

**AVATAR        SYSTEMS, INC.**

**NOTES        TO FINANCIAL STATEMENTS**

**(Unaudited)**

|   | · | Amortization                expense as a percentage of total revenue increased to 19.5% for the                quarter ended June 30, 2007 compared with 10.6% in 2006. The increase                in                the percentage of amortization expense is related to the Questa                acquisition. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Depreciation:*

|   | · | Depreciation                expense decreased 1.6% to $51,107 for the quarter ended June 30,                2007 from                $51,913 in 2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Depreciation                expense related to the acquisition of Questa was                $2,999. |
|--------|--------|-----------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

|   | · | Depreciation                expense as a percentage of total revenue decreased to 5.3% for the                quarter                ended June 30, 2007 compared with 5.6% in                2006. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Other      Income (Expense):*

|                                                    |   | Three                  months ended |    |   |   |   |   |
|---------------------------------------------------------|--------|-------------------------------------|---------|--------|--------|--------|--------|
|                                                    |   | June                  30,           |    | Change |   |
|                                                    |   | 2007                                |    | 2006   |   | Amount |   | % |   |
|                                                    |   |                                |    |   |   |   |   |   |   |
| Investment                  income                      |   | $                                   | 4,231   |   | $      | 6,689  |   | $ | (2,458 | ) |   | (36.7 | ) |
| Loss                  on sales of marketable securities |   |                                | -       |   |   | (258   | )      |   | 258 |   |   | - |   |
| Interest                  expense                       |   |                                | (69,329 | )      |   | (3,265 | )      |   | (66,064 | ) |   | 2,023.4 |   |
| Total                  other income (expense)           |   | $                                   | (65,098 | )      | $      | 3,166  |   | $ | (68,264 | ) |   | (2,156.2 | ) |

*Investment      Income:*

|   | · | Investment                income decreased to $4,231 for the quarter ended June 30, 2007 from                $6,689                because of lower invested balances subsequent to the acquisition                of                Questa. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Interest      Expense:*

|   | · | Interest                expense increased because of the debt incurred by the Company to                acquire                Questa. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------|

*Provision      for Income Taxes:*

**Six      Months Ended June 30, 2007 Compared to Six Months Ended June 30,      2006**

*Revenue:*

|                                   |   | Six                  months ended |      |   |   |      |   |
|----------------------------------------|--------|-----------------------------------|-----------|--------|--------|-----------|--------|
|                                   |   | June                  30,         |      | Change |   |
|                                   |   | 2007                              |      | 2006   |   | Amount    |   | % |   |
|                                   |   |                              |      |   |   |      |   |   |   |
| Software                               |   | $                                 | 314,675   |   | $      | 383,468   |   | $ | (68,793 | ) |   | (17.9 | ) |
| Maintenance                            |   |                              | 1,277,393 |   |   | 708,074   |   |   | 569,319 |   |   | 80.4 |   |
| Professional                  services |   |                              | 325,643   |   |   | 215,860   |   |   | 109,783 |   |   | 50.9 |   |
| Hardware                               |   |                              | 21,961    |   |   | 114,476   |   |   | (92,515 | ) |   | (80.8 | ) |
| Total                  revenue         |   | $                                 | 1,939,672 |   | $      | 1,421,878 |   | $ | 517,794 |   |   | 36.4 |   |

----

**AVATAR        SYSTEMS, INC.**

**NOTES        TO FINANCIAL STATEMENTS**

**(Unaudited)**

*Software:*

|   | · | Revenue                from software sales for the six months ended June 30, 2007 was $314,675                compared with $383,468 for the six months ended June 30,                2006. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Software                sales of Questa products were $256,403 for the six months ended June                30,                2007. Sales of the Integra product were impacted primarily by customer                upgrades to Integra. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Software                sales of Avatar products for decreased 84.8% to $58,272 compared                with                $383,468 for the six months ended June 30,                2006. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Sales                of Avatar products were unusually strong during the first two quarters                of                2006. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------|

*Maintenance:*

|   | · | Maintenance                revenue for the six months ended June 30, 2007 increased 80.4% to                $1,277,393 compared with $708,074 in                2006. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in maintenance revenue related to the Questa acquisition                was                $419,861 for the six months ended June 30,                2007. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Maintenance                revenue for existing products increased 21.1% to $857,532 compared                with                $708,074 in 2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in maintenance revenue was primarily related to the strength                of                ASP sales in 2006 and 2007. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

*Professional      services:*

|   | · | Professional                service revenue for the six months ended June 30, 2007 increased                50.9% to                $325,643 compared with $215,860 for the same period last                year. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in professional services revenue related to the Questa                acquisition was $166,043. Questa has historically received a higher                percentage of revenue from implementation and data conversion services                than Avatar. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Professional                services related to the Questa acquisition were higher because of                stronger                sales of the Integra system and an increase in the professional services                billing rate. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Professional                services related to existing products decreased 26.1% to $159,600                for the                six months ended June 30, 2007 compared with $215,860 in 2006. The                decrease in professional services was due to very strong first and                second                quarters in 2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Hardware:*

|   | · | Hardware                sales for the six months ended June 30, 2007 decreased to $21,961                compared                with $114,476 in 2006. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Questa                was not a reseller of hardware products. We expect hardware sales                to                increase in the future because of the acquisition, anticipated technology                changes and relationships that we have with hardware                vendors. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**AVATAR      SYSTEMS, INC.**

**NOTES      TO FINANCIAL STATEMENTS**

**(Unaudited)**

*Cost      of Revenue:*

|                                   |   | Six                  months ended |    |   |   |    |   |
|----------------------------------------|--------|-----------------------------------|---------|--------|--------|---------|--------|
|                                   |   | June                  30,         |    | Change |   |
|                                   |   | 2007                              |    | 2006   |   | Amount  |   | % |   |
|                                   |   |                              |    |   |   |    |   |   |   |
| Software                               |   | $                                 | 102,252 |   | $      | 163,017 |   | $ | (60,765 | ) |   | (37.3 | ) |
| Maintenance                            |   |                              | 229,508 |   |   | 129,001 |   |   | 100,507 |   |   | 77.9 |   |
| Professional                  services |   |                              | 109,793 |   |   | 46,854  |   |   | 62,939 |   |   | 134.3 |   |
| Hardware                               |   |                              | 18,918  |   |   | 91,627  |   |   | (72,709 | ) |   | (79.4 | ) |
| Total                  cost of revenue |   | $                                 | 460,471 |   | $      | 430,499 |   | $ | 29,972 |   |   | 7.0 |   |

*Software:*

|   | · | Cost                of software sales for the six months ended June 30, 2007 decreased                37.3%                to $102,252 compared with $163,017 for the six months ended June                30,                2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of software sales of Questa products for the six months ended June                30,                2007 was $55,040. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of software sales for existing products decreased 71.0% to $47,212                from                $163,017 in 2006 primarily due to lower commission costs on lower                sales                volume. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of software as a percentage of the related revenue decreased to 32.5%                for                the six months ended June 30, 2007 from 42.5% in 2006. Sales were                higher                for our internally developed products with higher margins during                the six                months ended June 30, 2007. Margins were less during the six months                ended                June 30, 2006 because we sold products that we purchase from outside                vendors with higher costs than our internally developed                products. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | We                expect cost of software sales to increase in the future because of                an                increase in the cost of database                components. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Maintenance:*

|   | · | Cost                of maintenance revenue for the six months ended June 30, 2007 increased                77.9% to $229,508 compared with $129,001 in                2006. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in cost of maintenance revenue related to the Questa acquisition                was $53,783 for the six months ended June 30,                2007. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |
|--------|--------|--------|

|   | · | Cost                of maintenance revenue for existing products increased 36.2% to $175,725                compared with $129,001 with the same period last year. The increase                in                cost of maintenance revenue was directly related to the increase                in                maintenance revenue from strong ASP sales completed during 2006 and                2007. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of maintenance as a percentage of the related revenue remained stable                at                18.0% for the six months ended June 30, 2007 compared with 18.2%                in 2006. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Professional      services:*

|   | · | Cost                of professional services for the six months ended June 30, 2007 increased                134.3% to $109,793 compared with $46,854 in                2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in cost of professional services related to the Questa                acquisition was $56,027 for the six months ended June 30,                2007. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**AVATAR        SYSTEMS, INC.**

**NOTES        TO FINANCIAL STATEMENTS**

**(Unaudited)**

|   | · | Cost                of professional services for existing products increased 14.8% to                $53,766                compared with $46,854 in 2006. The increase in cost of professional                services was directly related to the increase in professional services                revenue. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of professional services as a percentage of the related revenue increased                to 33.7% for the six months ended June 30, 2007 compared with 21.7%                in                2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Hardware:*

|   | · | Cost                of hardware sales for the six months ended June 30, 2007 decreased                to                $18,918 compared with $91,627 in                2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Operating      Expenses:*

|                                        |   | Six                  months ended |      |   |   |    |   |
|---------------------------------------------|--------|-----------------------------------|-----------|--------|--------|---------|--------|
|                                        |   | June                  30,         |      | Change |   |
|                                        |   | 2007                              |      | 2006   |   | Amount  |   | % |   |
|                                        |   |                              |      |   |   |    |   |   |   |
| Sales                  and marketing        |   | $                                 | 226,258   |   | $      | 139,037 |   | $ | 87,221 |   |   | 62.7 |   |
| General                  and administrative |   |                              | 624,253   |   |   | 300,809 |   |   | 323,444 |   |   | 107.5 |   |
| Amortization                                |   |                              | 379,495   |   |   | 196,323 |   |   | 183,172 |   |   | 93.3 |   |
| Depreciation                                |   |                              | 102,214   |   |   | 102,437 |   |   | (223 | ) |   | (0.2 | ) |
| Total                  operating expenses   |   | $                                 | 1,332,220 |   | $      | 738,606 |   | $ | 593,614 |   |   | 80.4 |   |

*Sales      and Marketing:*

|   | · | Sales                and marketing expenses for the six months ended June 30, 2007 increased                62.7% to $226,258 compared with $139,037 in                2006. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Sales                and marketing expenses related to the Questa acquisition were $30,087                for                the six months ended June 30, 2007. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Sales                and marketing expenses related to our existing business increased                to                $196,171 for the six months ended June 30, 2007 compared with $139,037                in                2006. The increase in sales and marketing expenses was related primarily                to the addition of a director of                marketing. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Sales                and marketing expenses as a percentage of total revenues increased                to                11.7% for 2007 compared with 9.8% for                2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*General      and administrative:*

|   | · | General                and administrative expenses for the six months ended June 30, 2007                increased 107.5% to $624,253 compared with $300,809 in 2006. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | General                and administrative expenses related to the Questa acquisition for                the six                months ended June 30, 2007 were                $127,093. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | General                and administrative expenses for our existing business increased 65.3%                to                $497,160 from $300,809 in 2006. General and administrative costs                increased                primarily due to charge-offs from bad debts, insurance costs, accounting                and auditing costs incurred related to the Questa acquisition, and                an                increase in investor relations                expenses. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | General                and administrative expenses as a percentage of total revenue increased                to                32.2% for the six months ended June 30, 2007, compared with 21.2%                in 2006.                The increase in general and administrative expense as a percentage                of                total revenue arising from the Questa acquisition and the increases                in                cost referred to above. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Amortization:*

|   | · | Amortization                expense increased 93.3% to $379,495 for the six months ended June                30, 2007                from $196,323 in 2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in amortization expense related to the acquisition of Questa                was                $156,636. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------|

----

**AVATAR        SYSTEMS, INC.**

**NOTES        TO FINANCIAL STATEMENTS**

**(Unaudited)**

|   | · | Amortization                expense as a percentage of total revenue increased to 19.6% for the                six                months ended June 30, 2007 compared with 13.8% in 2006. The increase                in                the percentage was due primarily to the addition of amortizable assets                from the Questa acquisition. The increase in the percentage was offset                by                higher reported total revenues. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Depreciation:*

|   | · | Depreciation                expense decreased 0.2% to $102,214 for the six months ended June                30, 2007                from $102,437 in 2006. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Depreciation                expense related to the acquisition of Questa was                $5,999. |
|--------|--------|-----------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Depreciation                expense as a percentage of total revenue decreased to 5.3% for the                six                months ended June 30, 2007 compared with 7.2% in 2006. The decrease                is                related to higher reported revenue. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Other      Income (Expense):*

|                                                    |   | Six                  months ended |     |   |   |   |   |
|---------------------------------------------------------|--------|-----------------------------------|----------|--------|--------|--------|--------|
|                                                    |   | June                  30,         |     | Change |   |
|                                                    |   | 2007                              |     | 2006   |   | Amount |   | % |   |
|                                                    |   |                              |     |   |   |   |   |   |   |
| Investment                  income                      |   | $                                 | 8,463    |   | $      | 12,304 |   | $ | (3,841 | ) |   | (31.2 | ) |
| Loss                  on sales of marketable securities |   |                              | (15      | )      |   | (258   | )      |   | 243 |   |   | (94.2 | ) |
| Interest                  expense                       |   |                              | (140,947 | )      |   | (5,689 | )      |   | (135,258 | ) |   | 2,377.5 |   |
| Total                  other income (expense)           |   | $                                 | (132,499 | )      | $      | 6,357  |   | $ | (138,856 | ) |   | (2,184.3 | ) |

*Investment      Income:*

|   | · | Investment                income decreased to $8,463 for the six months ended June 30, 2007                from                $12,304 because of lower invested balances subsequent to the acquisition                of Questa. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Interest      Expense:*

|   | · | Interest                expense increased because of the debt incurred by the Company to                acquire                Questa. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------|

*Provision      for Income Taxes:*

**Liquidity      and Capital Resources**

*Cash      flows from Operating Activities:*

----

**AVATAR        SYSTEMS, INC.**

**NOTES        TO FINANCIAL STATEMENTS**

**(Unaudited)**

*Cash      Flows from Investing Activities:*

*Cash      Flows from Financing Activities:*

*Working      Capital:*

----

**Item      3. Controls and Procedures**

**PART      II. OTHER INFORMATION**

**Item      1.****Legal Proceedings**

**Item      2.**
** **
**Unregistered      Sales of Equity Securities and Use of Proceeds**

**Item      3. Defaults Upon Senior Securities**

**Item      4. Submission of Matters to a Vote of Security Holders**

**Item      5.**
**      Other Information**

**Item      6. Exhibits**

| 31.1    Section                302 Certification pursuant to Sarbanes Oxley Act.               |
|--------------------------------------------------------------------------------------------------------------------|
|                                                                                                               |
| 32.1    Section                906 Certification pursuant to Sarbanes-Oxley                Act |

----

**S**
**ignatures**

|                                         |                                                                                                               |                                     |
|----------------------------------------------|--------------------------------------------------------------------------------------------------------------------|------------------------------------------|
|                                         | AVATAR                SYSTEMS, INC.                                                                                |
|                                    |                                                                                                          |                                |
| **Dated:                September 27, 2007** | By:                                                                                                      | /s/                ROBERT C. SHREVE, JR. |
|                                         | Robert                C. Shreve, Jr. Chief                Executive Officer Chief                Financial Officer |

----